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Applied Materials (AMAT -3%) turns lower today despite registering decent numbers across the board in Q3 (Jul). Mirroring its performance from last quarter, the semiconductor equipment giant surpassed analyst earnings and sales estimates by a healthy margin in Q3 and projected Q4 (Oct) figures in-line with consensus. Management also remained energetic on AI; CEO Gary Dickerson remarked that the technology represents a tectonic shift.

So why are investors reacting negatively today? Expectations climbed rapidly ahead of Q3 results, illuminated by shares of AMAT surging by over +20% from August 5 intraday lows. Meanwhile, AMAT's wide Q4 guidance reflected elevated uncertainty within the macroeconomic environment, projecting adjusted EPS of $2.00-2.36 and revs of $6.53-7.33 bln. The company's revenue forecast also translated to a mild 3.1% bump yr/yr at the midpoint, a deceleration from Q3. While AMAT's quarterly guidance has incorporated a wide degree of outcomes since 2022, investors may be starting to grow hungrier for tighter ranges given the expected ramp-up in wafer fab equipment spending in 2025 touched on by AMAT's peers, including KLA Corp (KLAC) and Lam Research (LRCX).

• AMAT's Q3 report underscored the industry's focus on major inflections, including AI, IoT, robotics, electric and autonomous vehicles, and renewable energy. AI is chief among these trends, with demand driving AMAT's expectation that its advanced packaging product revenue will double in size over the next several years. AI training requires leading-edge logic, DRAM, and high-bandwidth memory (HBM), all of which AMAT commands a sizeable presence.
• Most of these businesses recorded growth in Q3, pushing AMAT's consolidated revenue 5.5% higher yr/yr to $6.78 bln and supporting an 11.6% improvement in adjusted EPS to $2.12. The company saw a noticeable pull connected to AI and data center computing. Additionally, DRAM shipments remained robust despite sales in China declining by 11 pt sequentially. Meanwhile, HBM adoption continued to grow, comprising a larger percentage of AMAT's mix. Leading-edge foundry-logic demand was lower yr/yr but did strengthen sequentially, illuminating a mounting desire for advanced packaging.
• Other businesses also performed well, such as NAND memory sales, which climbed by 10% yr/yr. ICAPS (IoT, Communication, Automotive, Power, and Sensor) demand was decent, with some pockets of weaknesses branching from industrial and automotive, similar to what many others in the semiconductor industry noticed. Applied Global Services expanded by 8% yr/yr, underpinned by growth in customer factory utilization. Lastly, Display ticked 7% higher; management believes OLED technology will require a significant increase in capital investment, supporting sustained growth.

Even though it is not showing up in today's price action, AMAT's Q3 report was sound. AI demand continues to swell, providing an intensifying tailwind as AMAT heads into its final quarter of FY24. However, investors expected more after piling in over the past two weeks, leading to a lackluster response today. Nevertheless, we continue to like AMAT over the long run and view sharp pullbacks as attractive entry points.